certificate of deposit
A savings instrument holding a fixed amount for a fixed period at a guaranteed interest rate — typically higher than savings accounts.
Example
“The 12-month certificate of deposit locked in 5.1% APY before rates began falling.”
Memory Tip
CD — guaranteed rate for guaranteed time. Higher rate in exchange for locked-up money.
Why It Matters
Certificates of deposit help you grow savings more efficiently than regular savings accounts because they offer higher interest rates in exchange for committing your money for a specific time period. Understanding CDs is important for building wealth and making informed decisions about where to park money you will not need immediately.
Common Misconception
Many people believe they can withdraw money from a CD whenever they want without penalty, similar to a savings account. In reality, removing funds before the maturity date typically results in a substantial early withdrawal penalty that can significantly reduce or eliminate your interest earnings.
In Practice
If you deposit 10,000 dollars into a 12-month CD offering 4.5 percent annual interest, you will earn 450 dollars in interest by the end of the year, giving you a total of 10,450 dollars when the CD matures. However, if you need the money after 6 months and withdraw it early, you might face a penalty of 200 dollars, leaving you with only 10,250 dollars instead of the full amount you would have earned.
Etymology
From Latin 'certificare' meaning to certify — a certified commitment to hold the deposit.
Common Misspellings
Build a budget and track your spending
Related Terms
More in personal finance
Other personal finance terms you should know
See Also
Need financial definitions?
Clear definitions for 2,500+ finance, insurance, and investing terms.